Waha autumn-22 forward basis sells off as Permian production hits new highs

Forward gas markets in West Texas have recently begun pricing in much steeper basis discounts for third- and fourth-quarter 2022 as the outlook for Permian Basin production growth turns more bullish.

Over the past two weeks, forward basis prices at Waha Hub for September, October and November have seen stunning downward revaluations, despite little change to the spring and summer contracts.

On Feb. 10, forward basis for the three autumn months settled to an average $1.28/MMBtu discount to the benchmark Henry Hub – down from an average discount of just 77 cents on Jan. 25, S&P Global Platts most recently published M2Ms forwards data shows.

Comparatively steep basis discounts at Waha during the autumn month are nothing new. With the addition of new takeaway capacity from the Permian in recent years, though, the price pain for producers has eased.

Startup of the 2 Bcf/d Whistler Pipeline in July 2021 was among the most recent additions, preceded just months prior by Kinder Morgan's 2.1 Bcf/d Permian Highway Pipeline in January 2021.

During the recent autumn months, the added eastbound capacity on the two pipelines helped to keep cash basis at Waha to just 44 cents discount to Henry Hub from September to November 2021. Over the same three-month period in 2020, the basis price discount at Waha averaged 96 cents behind Henry Hub. In 2019 – as capacity on the earlier Gulf Coast Express expansion was still ramping up – the basis discount at Waha averaged $1.23/MMBtu behind the benchmark, S&P Global Platts data shows.

The potential return of steeper basis discounts at Waha this fall comes as upstream activity in the Permian Basin continues to accelerate, allowing producers there to make a surprisingly speedy recovery from a series of freeze-offs that hit West Texas earlier this month and in January.

Production

Over the past week, Permian gas production has surged, rebounding from an early February freeze to hit a new record high Feb. 11 at over 14.1 Bcf/d, S&P Global Platts Analytics data showed.

The quick rebound in output may come as no surprise considering the pace of recent drilling activity.

Earlier this month, rig count in the Permian edged up to an estimated 309 marking its highest since early April 2020. In the week ended Feb. 10, the count was down by just four to 305, Enverus data showed.

In December, the number of wells drilled in the Permian edged up to 315 – also the most drilled in any month since April 2020. Over the six months ended in December, well completions in the Permian averaged over 400 per month setting a pandemic-era high, according to data from the US Energy Information Administration.

The acceleration in upstream activity has set bullish new expectations for Permian production growth this year, which could put renewed pressure on gas prices in West Texas as existing production-takeaway capacity continues to fill.

According to Platts Analytics, Permian gas production could top 15 Bcf/d by later this year and potentially fill the basin's existing egress capacity by mid-decade if not sooner.